What IS indirect cost money, anyway?

Feb 09 2016 Published by under [Education&Careers]

Based on discussions on twitter, it seems pretty clear that a lot of Non-PI scientists don't really understand the concept of indirect costs, aka overhead. Most people know that a university's overhead rate is what they take from federal grant dollars to "keep the lights on", so to speak. But how is it calculated and how is it spent?

The indirect rate is something each university negotiates with the federal government. So, when someone tells you their overhead rate is 51%, that the number their university has worked out with the feds. The rates for NSF, DoD and NIH are always the same, USDA and (I think) NASA are lower. That's a discussion for another time. Now, a rate of 51% does not mean half your grant goes into the dark cauldron of university expenses. Overhead is calculated by taking the total of adjusted* direct costs and finding the 51% of that number and adding it to the total direct costs.

So, if your adjusted direct costs are $100k, the overhead on that will be $51k. If, once you add tuition and equipment in, your total direct costs are $120K, the total budget will be $171k. In this hypothetical case, the overhead amount on the grant is only about 30% of the total budget. NIH applicants only ever deal with their direct costs in a budget (ie, NIH budget limitations, inasmuch as the exist, are on direct costs only, not total budget), but everyone else calculates the total budget.

Ok, so now that we have calculated overhead and you were awarded the grant, what happens to all that money? Well, it doesn't get freed up into the coffers until you spend money off your grant. For every dollar you spend, fifty-one cents of overhead money gets it's wings. As you spend, the university gets cash.

Most of that cash will find it's way directly into the university-level machine. Somewhere in the neighborhood of 70-80% will get gobbled up right away, with the rest landing next in your college. Your college will take a giant bite out of that (usually at least 50%), before your department gets to swing the bat. Different departments do it differently, and I've seen situations where the department takes everything that remains, whereas others return all of the overhead back to the investigator. Usually the solution is somewhere in between, so let's say that 50% goes to the department and 50% goes to the PI.

The PI is allowed to use that money to do things like cover shipping, buy software and journal subscriptions, bring in people for interviews for lab positions, cover salary, etc. In many places, this is a very useful, if small, pot of money to have available. However, overhead generated on a particular project should, by law, be expended entirely by the end of that project. In practice, this is almost impossible, but stockpiling overhead money to CYA later is heavily frowned upon.

What the university and college do with the overhead money varies, but much of it is related to supporting costs of the research enterprise (think, compliance, university vet, grants staff, etc.). Additionally, those monies are often used as part of start-up packages for new hires, meaning a lean year for indirects directly effects the hiring and recruitment process.

* Some things like equipment and tuition are non-overhead bearing budget lines, so they are subtracted from the total.

17 responses so far

  • The frugal ecologist says:

    Nothing new here to me - my old dept gave 100% back to the PI but by that time it was very small.

    I'd love to know more about how rates are actually negotiated. Seems Universities have an incentive to get it as high as possible - hence >60% at some places. What incentive do agencies have to keep low?

  • Agencies don't want to be spending all their money supporting universities and not the proposed science. Whereas there are no hard caps on SNF budgets, POs would rather be spending their program dollars on more science and less admin.

  • pyrope says:

    NASA pays full overhead, and I think some regular grants to USDA are full. But all USDA funds to land grant schools are reduced, and the other agencies in Dept. Interior are limited. At my U, USFWS, USGS, BLM and USFS are all fixed at 20-25%.

  • DJMH says:

    Is it typical for some to trickle back to the PI? As new faculty I have been told that I get $1000/yr in slush money, but no mention of whether this will increase if I bring in more indirects...

  • Everywhere is different.

  • odyssey says:

    Everywhere is different.

    No truer words spoken.

  • Dave says:

    Is it typical for some to trickle back to the PI?

    Depends what the administrators need for raises in a given year....

  • drugmonkey says:

    Agencies have the same incentive everyone else does. To try to make somebody else pick up part of the cost of the good or service it is buying. In this case, Universities.

  • Steve says:

    This isn't quite correct. Indirect cost funds are *reimbursements* for estimated (and in practice, negotiated) indirect costs -- the theory is that the university has fronted the money to build and heat the building, hire the accountants, etc., and it is now getting the money back to cover those costs. But once the money is returned, those particular dollars don't have restrictions anymore on when or where they are spent. Those of us in state universities who recognize that not all money is green should be very interested in ICR: it is the greenest (most flexible) funding the university has!

    Indirect costs themselves are very real costs. We say ICR rates are negotiated and it suggests the rate is just made up, but in practice the costs are very carefully audited in periodic reviews -- the negotiation in practice is deciding which costs are allowed and which aren't, and in the real world the rate is always set below the true cost of supporting extramural research. (For example, the administrative cost portion of the negotiated rate is capped at a fixed percent.) And rates are always estimates since they use past expense ratios estimate future costs. But the bottom line is that university indirect research costs are always subsidized from other sources than the granting agencies.

    Further, if indirect cost return is allocated to other purposes than reimbursing those who paid for infrastructure and other costs (e.g., if it is returned to the PI as discretionary funds), there is money paying the actual costs that is being diverted from another source. In a state university, that is often state funding -- for example, a state may pay to build a building, and then not claw back the indirect cost returns that the depreciation of that building generates. Tuition money is also often redirected to support research, not always unreasonably because student involvement in scholarship has educational benefit. But if indirect costs are flowing back to the PI, we should recognize that there is a subsidy being put into the system elsewhere to compensate.

  • ELS says:

    I've never heard of IDC flowing back to the PI and only rarely even to the department. It is usually swallowed whole by the great maw of administration. Our campus even wanted to force us to spend direct funds on trash collection and internet. They finally backed down, in part because faculty reminded admin that we could submit grades on paper spreadsheets rather than electronically.

  • Jan says:

    This is really useful and informative. I'm a 3rd year Assistant Professor with two active NSF grants where I am solo PI, and I had no idea that PIs (at some places) get a small portion of their indirect costs returned back to them! Time to call a meeting with my department chair!

  • ecologist says:

    @Steve has a useful description of how indirect costs work, that dispels a lot of misconceptions. The negotiation process to set an IDC rate can be very contentious, and institutions have to justify why the need the money and what it will be used for. Another fact not commonly appreciated: indirect costs must be collected on all grants, regardless of whether the agency or foundation will pay those costs. So if the university rate is 50%, but a foundation will only pay 10%, the university must cough up, from its own funds, the remaining 40%.

    I do have to disagree with the statement "But once the money is returned, those particular dollars don't have restrictions anymore on when or where they are spent." That is not true; there are strong restrictions on what indirect cost money can be spent on. For example, only a limited amount of indirect cost money can be used to provide bridge support for staff at a soft-money institution. "Giving back" indirect cost money to faculty to be used for direct costs of research is going to set off all kinds of auditing alarms.

    Money is fungible, of course, so having the indirect funds to be used for their purposes may free the university to give out their own unrestricted funds, and they might do that in some kind of proportionality to the indirect costs that one has brought in, but it is not simply returning indirect costs to the investigator.

  • New PI says:

    Woah, I didn't realize these costs might be returned in any way. I'm at a private R1 and have a NIH grant. My department provides minimal supplies; I'm supposed to buy my own trash cans (I scavenged a few instead). I've been charging things like computers, paper, and printer cartridges to my startup, which makes me a little bummed, because it makes my startup feel more like a glorified Staples account than real research money. Moreover, the startup will eventually run dry. Is this a reasonable thing to discuss with people? (Should I see if I get tenure first?)

  • It's reasonable to test the waters and figure out how others do it. Maybe ask around about how people pay for shipping or computer supplies once their start-up is gone. That'll give you an idea about the range available to you.

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  • pyrope says:

    I'm at an R1 and we get a return on indirects - I think the U keeps 70%, but the remaining 30% gets split between college, department, and PI. So, as you spend a grant, 10% of the associated overhead costs end up in your research fund. I really appreciate this system, as it provides a little bit of extra cash when things get tight. It has also served as a temporary loan source when grants (invariably) don't show up on the start date.

  • Eli Rabett says:

    Where do you think your startup come from?

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